Oil search to go on in Africa despite fall in crude prices

Oil exploration will continue in the sub-Saharan Africa this year despite the significant slump in crude prices in the second half of 2014.

GlobalData, a think tank for the energy and healthcare markets, says in its latest report that emerging oil and gas hotspots in Kenya, Uganda and Tanzania are expected to accelerate exploration in East Africa, compared to its counterparts globally.

Another area of focus for exploration is West Africa with great attention being paid to Ghana, Guinea, Ivory Coast and Senegal. This is because of recent discoveries, high exploration success rates and relatively low operating costs, the UK-based consultant said.

“Sub-Saharan Africa can expect to see substantial investment in its oil and gas resources as recent discoveries continue to attract companies to explore its vast deposits despite the low oil price environment. The region has shown resilience to falling oil prices, with exploration being planned and executed due to its lower cost environment and supported by recent commercially viable discoveries,” reads the report.

GlobalData’s research contrasts a report released by the World Bank in January, which warned that lower crude prices could discourage investment in exploration and development, specifically for new undertakings.

REDUCED FUNDING

“If lower oil prices persist, they could undermine investment in new exploration or development. This would especially put at risk investment in some low-income countries or in unconventional sources such as shale oil, tar sands and deep sea oil fields,”  World Bank said  in its Global Economic Prospects report.

Crude oil prices fell by more than 57 per cent between June last year and January 2015 to less than $50 per barrel — a six-year low.

As a result, some international oil and gas companies operating in the country announced plans to cut back their exploration budgets.

The plunge in crude prices also forced oil and gas companies to shelve borrowing to finance exploration and consequently opt for mergers and acquisitions to spread the risks and plug deficits in their budgets.

In January, Afren Plc, a British oil and gas company with two exploration licences in Kenya, announced that it would reduce its financing requirements.

It also revealed that it was considering a merger with Seplat Petroleum Development Company of the UK to boost its liquidity.

Last year, Swala Energy, an Australian oil and gas explorer with a licence for block 12B in Kisumu, put on hold plans to raise Sh378 million that was meant for exploration in Kenya, among other countries it has interests in citing an “unfavourable market” brought about by the drop in crude prices.

LOW-RISK ACREAGE

UK’s Tullow Oil recently announced that it would slash its global exploration and appraisal budget for 2015 from $300 million to $200 million.

Tullow’s partner, Africa Oil Corporation of Canada, is however undertaking a cash call to raise $125 million to fund ongoing appraisal and pre-development work in Kenya’s South Lokichar basin.

“In East Africa, the emerging countries of Kenya and Tanzania have seen companies such as Tullow Oil focus their exploration objectives onshore. Tullow’s drilling plan focuses on low-risk acreage rather than exploration in the capital-intensive offshore,” said Young Okunna, an upstream analyst at GlobalData

Kenya has discovered more than 600 million barrels of oil at the Lokichar basin, which has led to the start of development studies with production set to begin in 2018.

According to GlobalData, oil and gas companies are keen to explore the onshore East African Rift system where the Lokichar basin is located as a result of the crude oil deposits.